After a really sleepy day (and even a sleepy quarter, as it happens), InterOil (IOC) shares shot up in the last hour of trading on Friday, on rather heavy volume. This despite market makers usually taking it down at option expiration (we invite readers to check with their favourite chart providers for what happened on the last couple of expirations).
The reason most likely was the release of a tactical trading idea from Evan Calio from Morgan Stanly, the company having a $135 price target on InterOil raised its earnings estimate (see video here). Calio believes that InterOil's share price will rise in absolute terms over the next 60 days.
He burned his fingers a couple of times before with stuff like this, so one could either shrug his opinion off, or perhaps he's made sure to be extra careful this time. Why does Calio see upside in the near term? Well, noises out of the company have become distinctly positive.
Progress on all dimensions
Good progress is being made on the three plants and related (shared) infrastructure that is going to monetize the gas from Elk/Antelope. These plants are:
- A condensate stripping plant (CSP) joint-venture with Mitsui (GM:MITSF)
- A modular 3mtpa LNG plant build by Energy World Corporation (EWC) in exchange for 14.5% of gas revenue
- A floating LNG (FLNG) plant build by Flex of Norway and Samsung Heavy Industries, financed by Flex in exchange for 14.5% of gas revenue.
In the latest conference call on August 11, progress was reported and a commitment to final investment decision on all three by the end of this year reconfirmed:
In terms of the investment so far, as of June 30, 2011, $301 million has been spent on the Elk/Antelope fields, of which InterOil has contributed $226 million. $16 million has been spent on road, construction and site works associated with the Gulf LNG project sites. This is currently being funded by InterOil. And $25 million has been spent on the condensate stripping front-end engineering and design, which is being funded by Mitsui.
The LNG joint venture between Pacific LNG and InterOil has spent approximately $29 million, and our LNG partners, Energy World and FLEX LNG/Samsung, have invested in funding the engineering and design for the liquefaction facilities, as well as early [readouts]. Our Board has also committed $100 million towards preinvestment in pipe and associated equipment, [with] tenders for supply are currently in the market.
You can find the recordings of the CC here, and the presentation slides here (pdf). After a $275M placement last year (in which management participated at $75 a share for more than $44M), it has enough funds. According to the conference call:
In the current proposed development plan, the Elk/Antelope fields, pipelines to the coast, and export terminals are to be financed by InterOil and its partners. Our forecast cash will be sufficient to fund our share of these facilities. However, it will be prudent and efficient to make use of low financing environment once we complete offtake agreements, given the very low gearing of the Company.
And there are added funds to come:
I would also like to highlight the participation of the government of Papua New Guinea in the project of 22.5%, once the elect their participation under the Oil and Gas Act. As part of the election, the government would be required to reimburse InterOil and its partners for the 22.5% of the site costs in relation to development so far and historical exploration costs on all prior wells in our licenses. We will then, when this occurs, we will account for somewhere between $110M and $120M in recoverable expenditures in our financials. Additionally, we will have $60M to $70M of future tax benefits to account for at about the same time
It's not hard to think of where that money will come from. Last month, Shell signed a deal with Petromin:
Papua New Guinea energy company Petromin has signed a joint oil and gas exploration deal with energy giant, Shell." Under the agreement, Shell will finance all joint exploration and development of new oil and gas projects, as well as other projects that Petromin already has.
Since the conference call, optimism is increasing. Earlier (August 3) InterOil announced a HoA agreement for 1mtpa LNG offtake contract with Noble Energy (NBL), and the importance for financing EWC and Flex (although up to half the FLNG is already paid for with Samsung not requiring the remainder until the vessel is finished) was not lost. According to the conference call:
Mr. Conrad Kerr led the signing of our largest LNG offtake this past month with Noble Clean Fuels for 1 million tonnes. This provides almost 300% debt service coverage for EWC and FLEX in our LNG projects.
But there is more to come:
Henry Aldorf, president of Pacific LNG, told delegates at the LNG World conference in Perth, Australia last week that he expects an additional two or three buyers to sign up for the remaining 2.5 million tons/yr in volumes. Pacific LNG -- an affiliate of Clarion Finanz, a private company specializing in energy and mining investments -- holds 47.5% of Liquid Niugini, with PNG-focused InterOil holding the remaining 52.5%.[International Oil Daily]
That message was confirmed in the conference slides used by Aldorf (available here pdf). It might be a good time to consider who Henry Aldorf is. He is the person who masterminded Marathon's LNG plant ahead of time and under budget, and seeing InterOil's potential he came on board almost two years ago. His impact has been swift, changing strategy from a traditional LNG plant at Napa Napa (next to InterOil's refinery), to a much faster and cheaper plan involving modular and floating plants in the Gulf area. Some of the thinking behind the strategy change can be learned from these videos.
Conrad Kerr, the LNG marketing man, described the Asian LNG market during the call:
And most significantly, I think, what we're seeing is there's slowdowns and potential delays occurring in the large LNG projects that have been under development for some time in the Australia/Asia region. And these slowdowns and delays will create a window, in our view and in many of the analytics we've seen, of almost nonexistent new supply in the 2014-2017 timeframe. And so our project will be one of the few that has new supply available in what will be a very tight market.
CEO Phil Mulacek added:
We currently have about 20 million tonnes of LNG interest on the remaining volumes. That provides great confidence that additional offtakes are forthcoming.
No doubt the biggest surprise during the call was the following statement from Mulacek:
We are in confidential partial sales in the $5 to $7 range. Even though I can't promise closure on a sale yet, we are confident once again we have a material disconnect in our valuation.
It remains to be seen whether they can pull this of. However, since InterOil trades at less than 50 cents per Mcf, needless to say should such a transaction materialize, it would provide a rather steep upside.
Last but certainly not least, good news came from the seismics regarding the Bwata/Triceratops fields. We know there is gas there from a discovery well:
The Bwata - 1 well encountered 516 feet (157 meters) of gas pay in the Miocene Puri limestone and tested a maximum sustained flow of 29 mmscfgd through a 1/2 inch choke over four days, indicating an estimated open hole potential of 43 mmscfgd. [Business Wire]
Some while ago, new seismics had shown several reef structures in these fields (reef is very porous, it's what's making the Antelope field so productive). On the basis of that, Knowledge Reservoir (pdf) made an initial estimate of the field of 4.6Tcf (see p25 of Aug. presentation to the Oil And Gas Conference - pdf).
Dave Holland, Manager of Exploration, on the conference call also unveiled new studies:
At this stage, we are genuinely excited as the preliminary field process migrator stacks have shown good data quality and as we feel indicate potentially more reefal development than is currently mapped. Processing is in progress on the acquired lines. And upon completion of the acquisition of the final line, processing will take about a further two to three weeks. Based on the remapping of the new seismic in this area, the two structures -- Triceratops and Bwata -- have merged into a single field, the Triceratops field. The next well in this field will be Triceratops 2. A Triceratops 2 location has been finalized and is currently in preparation. The well design and drilling program for the well are being finalized for submission to the PNG Department of Petroleum & Energy for review and approval. The forward plan is to complete the rig site construction, mobilize and rig up, with an expected spud date in the fourth quarter.
An even bigger, single structure means potentially more reefal development, which sounds promising. Here was an exchange during the call:
Evan Calio, a Morgan Stanley Analyst:
Recent presentations you had, your acknowledged reservoir, I think you calculated like a 4.5 Tcf, P50 on what was I guess Triceratops and Bwata fields. But, I mean, now you're saying more reefal indications around these structures. Does that mean that at least that estimate isn't as current as some of the recent stuff you've processed?
David Holland - InterOil Corporation - Manager of Exploration:
Yes, no, I think the Phase 3 seismic with Triceratops, we have two things. We have not at this stage determined the full extent, geographic extent of the field. But what we did in this program was to focus on the reefal development within the field. That's where the greatest hydrocarbon [pull] volume increases can be won. And as we're indicating, we've completed virtually within a day or so of completing the Phase 3 program. And we, in the initial process product that we're seeing, it's looking very positive.
Phil Mulacek - InterOil Corporation - CEO:
It's broader, and it's bigger.
- See here for overview until June 30, you'll notice:
- Capital Research 5,188,824 + 14%
- And another 13% in July-August
- Fidelity 2,994,800 + 42%
- Frontier capital 1,760,322 + 25%
- Soros holdings was a fraction down, which was reported endlessly on the web. What's much less reported is that he added a whopping 20% in July to 4.9M
- We might also recall that Management bought 14% of a share offering at $75 last November
And why analysts are bullish
- Morgan Stanly has a NAV of and a target price of $135, but this assumes only $2 per Mcf in a sell-down of Elk/Antelope and nothing for Bwata/Triceratops while it acknowledges that the new seismics ["provides clear upside to the P-50 pre-drill estimate of 4.6Ttcfe of the T-2 well that will likely TD before year-end."]
- Macquarie has a price target of $120
- Raymond James has a $80 price target but this is based on a backward looking NAV of $109 or $123 depending on whether P1 or P2 resource numbers are used. It doesn't include anything for the other fields and acknowledges that
["Management is targeting deal multiples in the $5-7/Mcf range for in-ground resource; for some perspective, the stock is currently trading just below $0.50/Mcfe."]
- BNP Paribas has a $90 target
We have a feeling Morgan Stanley's tactical idea has given the signal for this progress to be more reflected in the share price. Just like MS, we remain bullish on InterOil.
Disclosure: I am long IOC.